The Associated Press

Gov. Gray Davis urged sweeping changes Monday to California’s beleaguered electricity system, proposing a public agency to build power plants and threatening to seize the plants of wholesalers who gouge consumers and utilities.

Davis, in a State of the State address to the Legislature watched closely by Wall Street, utilities and ratepayers, called California’s deregulation of its power system “a dangerous and colossal failure.”

He pledged at least $1 billion in state money to resolve the electricity crisis, which put California on the brink of rolling blackouts at least twice last month.

“There is no easy solution. But, if I have to use the power of eminent domain to prevent generators from driving consumers into the dark and utilities into bankruptcy, then that’s what I’ll do,” Davis told lawmakers.

“The time has come to take control of our own energy destiny,” he added, to legislators’ cheers. Ironically, shortly before he spoke, the state’s grid managers declared an alert to conserve energy.

The governor has authority to exercise eminent domain on behalf of the state, which includes seizing power plants and forcing them to operate.

“It’s a very broad power. If the health and welfare of California is impacted in significant ways, he has emergency powers, including this,” said Attorney General Bill Lockyer, whose office is investigating price fluctuations in California’s turbulent electricity market.

Davis would only use that power as a last resort if citizens’ health and welfare was threatened, spokesman Steve Mavligio said, adding that blackouts could constitute such a threat.

But power plant owners questioned the wisdom of such a move.

“Let’s say the state seized our power plants – not an additional kilowatt would be produced. It does nothing to produce power, which the state so desperately needs,” said Tom Williams, a spokesman for Duke Energy. Williams said earlier that Duke would fight any attempt to take over its plants.

Duke owns four power plants with a total capacity of 3,351 megawatts and an investment in California of $1.6 billion.

Pacific Gas and Electric Co. and Southern California Edison Co. have suffered $9 billion in losses since June because the utilities, their rates capped, have been unable to pass the high cost of wholesale electricity on to their customers.

Wholesale electricity prices have increased five-fold since early summer.

Both utilities said they were encouraged by Davis’ speech, but said it contained no indication of immediate action to ease spiraling wholesale prices or assure of them of new revenue.

PG&E said it would face financial ruin “unless strong steps are taken over the next few days”; SoCal Edison said “urgent action is needed.”

Davis’ speech contained his strongest comments to date on California’s electricity crisis. He said he would set aside $1 billion in his 2001-02 state budget plan to stabilize the supply and price of electricity and provide new power generation.

Davis rejected suggestions from consumer groups that PG&E and SoCal Edison be allowed to go into bankruptcy.

“Our fate is tied to their fate. Bankruptcy would mean that millions of Californians would be subject to electricity blackouts,” Davis said.

But he offered few details about his core proposal, the creation of public power entities. He said he envisioned a state power authority to buy and build new plants, or perhaps a joint powers agreement between the state and more than two dozen municipal utilities.

Davis’ plan also provided no specifics on how he would deal with the utilities’ billions of dollars in red ink. One proposal floated at the Capitol suggested using billions of dollars in state-backed bonds to finance the utilities’ debt.

“This is something that we wanted addressed starting in September, we as Republicans, and it’s been put off,” Assembly Minority Leader Bill Campbell, R-Villa Park, said of the debt.

Davis demanded criminal penalties for wholesalers that withhold power from the California grid during emergencies, and authority to force idled power plants back into operation. Davis proposed adding 50 inspectors to the Public Utilities Commission to monitor any facility suspected of deliberately withholding power from the California grid.

Davis’ plan came just hours after Assembly leaders offered their own proposals, some similar to his.

Those would rebuild the agencies that manage the state’s electrical grid and wholesale electricity clearinghouse, encourage long-term contracts between utilities and wholesalers to cut costs, expand conservation and penalize electricity profiteers.

Assembly Speaker Robert Hertzberg, D-Los Angeles, said the proposals were intended to benefit consumers and “not to protect any utility investor or corporate executive.”

Assembly hearings on California’s electricity crisis were scheduled to begin Thursday.

The Public Utilities Commission last week approved rate increases of 7 percent to 15 percent, but Wall Street and the utilities said it was inadequate.

Fiscal analysts say more rate hikes – or some other form of new revenue – is needed to shareholders in the investor-owned utilities, which serve 25 million people. The utilities agree.

“We have to be able to restore in the minds of the financial community the credit-worthiness of California and its public utilities, or will not have the ability to borrow the money to keep the lights on,” said Tom Higgins, a senior vice president of SoCal Edison.

The company, along with PG&E, said it faces insolvency in weeks unless it obtains more money.

A consumer group that favors public ownership of California’s electricity system said SoCal Edison was not in financial jeopardy.

The Foundation for Taxpayer and Consumer Rights said SoCal Edison‘s parent company, Edison International, had $37.9 billion in assets, according to the company’s filing with the Security and Exchange Commission.

“Edison should bail itself out of the mess it created,” said Doug Heller, a foundation spokesman.

Davis and other state officials believe the prices have spiked largely because profiteering wholesalers have exploited flaws in California’s deregulated electricity market.

Wholesalers have denied the accusation.

State officials also note that demand has been high during a hot summer and cold winter, reserves are scarce, a number of power plants are down for maintenance and imports have dwindled as other states compete for power.

Meanwhile, Energy Secretary Bill Richardson extended his emergency order requiring suppliers to sell electricity to California when the state runs short.

Richardson, Treasury Secretary Lawrence Summers and Gene Sperling, director of the National Economic Council, planned to meet Tuesday in Washington, D.C., with Davis and Federal Energy Regulatory Commission Chairman James Hoecker to discuss potential solutions to the state’s energy problems.

Davis wants FERC to set a regional cap on wholesale prices until the proposals in his State of the State address take effect, Maviglio said. The commission has resisted that proposal.